Quantifying Central Hypotheses on Environmental Kuznets Curves for a Rich Economy: A Computable General Equilibrium Study
| DOI | http://doi.org/10.1111/1467-9485.5002003 |
| Author | Annegrete Bruvoll,Birger Strøm,Taran Fæhn |
| Date | 01 May 2003 |
| Published date | 01 May 2003 |
QUANTIFYING CENTRAL HYPOTHESES
ON ENVIRONMENTAL KUZNETS
CURVES FOR A RICH ECONOMY:
A COMPUTABLE GENERAL
EQUILIBRIUM STUDY
Annegrete Bruvoll*, Taran Fæhn * and Birger Str
m*
Abstract
We investigate whether the future relationships between several pollutants and per
capita income in rich countries may assume the inverted U-forms of Environmental
Kuznets Curves (EKC). The emission-augmenting effect of scaling up aggregate
economic activity can be counteracted by greener composition of production and
consumption, technological progress, and increased demand for environmental
quality and policy. To quantify the importance of these central hypotheses, we use
a CGE model with endogenous policy for Norway. Our results suggest significant
future effects of all these three counteracting mechanisms. For most local and
regional pollutants, they may be strong enough to prolong the falling emission
trends. However, we cannot rely on reductions in emissions of climate gases and
some transport-related local pollutants. Our results also indicate that pollution
leakages abroad are likely to take place.
IINTRODUCTION
Over the last decade, a long series of studies have investigated the relationship
between pollution and economic growth per capita. Initial papers by Grossman
and Krueger (1993, 1995), Shafik and Bandyopadhyay (1992) and Selden and
Song (1994) presented evidence that some pollutants have historically followed
an inverted U-curve with respect to per capita income. This relationship is
usually referred to as the Environmental Kuznets Curves (EKC). The
observations may lead to the conclusion that a more or less automatic link
between income growth and environmental improvements may, in general,
ensure environmental improvements also in the future. However, a range of
underlying forces influences the environment in opposing directions. Thus,
it is not possible to conclude whether the trend will continue or not, without
further analyses of the driving forces and estimates on the future economic
development.
n
Statistics Norway
Scottish Journal of Political Economy, Vol. 50, No. 2, May 2003
rScottish Economic Society 2003, Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK
and 350 Main Street, Malden, MA 02148, USA
149
Several theories for the observed EKCs have been proposed (see, e.g.,
Borghesi, 1999, for a survey of the theories and empirical results from the
literature). One branch of theories emphasises that changes in the composition of
consumption and production reduce emissions per unit GDP when the economy is
growing. Services and green-labelled products are relatively income-elastic,
implying that their share of consumption and production may increase with
income. Further, income growth may bring about a cleaner composition of
available production factors. Rich economies tend to rely more on human
capital and knowledge accumulation. Also, the environment, regarded as a
production factor, becomes scarcer as the natural resource stock and the
nature’s restoration capacity gradually decline.
A second branch claims technological changes as explanatory factors. Growth
in factor productivity promotes more efficient use of resources and less pollution
per produced unit. Increased factor mobility, international trade and use of
information and communication technology are characteristics of the growth
process that contribute to an effective diffusion of innovations.
A third branch of explanations advocates political economy mechanisms (see,
e.g., Jones and Manuelli, 2001). Environmental goods are normal goods
(Kristro
¨m and Riera, 1996), thus higher income increases the demand for a
cleaner environment. Agents influence the government through political
economy mechanisms like lobbying, voting and other political activities (see
Drazen, 2000, for a survey). A higher acceptance for environmental regulations
and taxes reflects increased willingness to pay for the environment, and such
policies also stimulate environmentally friendly technologies.
The crucial question within the EKC literature is whether positive
environmental effects via compositional changes, technological progress, and
political economy processes, are sufficient to counteract the negative environ-
mental implications of scaling up aggregate economic activity. The predominant
approach to the EKC has been to study historical data on the relationship
between economic growth and some environmental indicators. Findings suggest
that counteracting effects dominate for many emissions, especially for rich
countries. Thus, it is of great interest to investigate whether this trend can be
expected to continue. We supplement the econometric contributions by
considering the EKC relationship for a rich country in a forward-looking
perspective. Our tool is a complex computable general equilibrium (CGE) model
that integrates economic and environmental mechanisms. A general framework
enables us to take into account central assumptions and mechanisms of
relevance to the environmental development, such as future changes in
technology, factor endowment and energy markets for the next three decades.
Empirical contributions based on CGE models have been modest. Andersen
and Cavendish (2001) shed some light on the EKC by studying exogenous
environmental policy within a CGE model. In a CGE study of trade liberali-
sation, Jansen (2001) lets environmental regulations depend endogenously
on income. Ansuategi and Escapa (2002) study policy effects on EKC by
modelling governmental tax behaviour explicitly in an overlapping generation
framework. Our contribution is to study all the hypotheses simultaneously in a
ANNEGRETE BRUVOLL, TARAN FÆHN AND BIRGER STRØM150
rScottish Economic Society 2003
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